NEW YORK (Dispatches) - Oil prices, already at more than three-year highs, may be about to jump further.
Brent oil could spike to $80 a barrel if the U.S. and European Union reimpose sanctions on Iran and as Western powers expand the scope military activities, JPMorgan strategists, led by John Normand, written in a note.
"Risks we thought might materialize this summer through Iran sanctions are emerging somewhat more,” said the strategists.
A possible decision in May on Iran sanctions may be "the start of a process that maintains low-intensity stress on oil markets that can deliver higher prices and above-average volatility," the strategists wrote, comparing it to the Arab Spring of 2011 rather than the major oil shocks of 1973, 1979 and 1990. Since the U.S. doesn’t buy Iranian crude, it would take sanctions from the EU and even some Asian customers to depress markets materially.
The forecast follows others calling this a good time to own energy stocks. Morgan Stanley strategist Andrew Sheets has noted that energy "has historically been a very consistent late-cycle outperformer.” Brian Barish of Cambiar Investors and James Paulsen of Leuthold Weeden Capital Management have pointed to energy shares having been out of favor in recent years. Net bullish positions in Brent futures reached a record in the week ended April 10.
JPMorgan’s strategists have positioned for higher oil prices that could last three to six months, before U.S. shale production can respond, rather than for an acute supply cut that delivers subtrend global growth.
"Equity and credit markets probably won’t welcome a geopolitical/supply-driven rise to $80 that could persist for several months," they wrote, but it won’t be "an event that drives a bear market in either.” Brent last cost $80 a barrel in November 2014.
While Brent is up 8 percent in 2018 and more than 30 percent over the past year, those aren’t major moves for such a volatile market, according to JPMorgan. It also isn’t alarming when strong demand has aided the rise.
"Oil is the standout market this month in that it is the only global asset price making new 2018 highs," the strategists wrote. "But the reason we refocus on crude this week is geopolitical context and systemic potential."